Annuities

Question 1

Define Annuity

Answer 1

An annuity is a periodic payment that continues for a fixed period or for the duration of a designated life or lives.

Question 2

What are the 3 major types of annuities sold today?

Answer 2

Fixed annuity
Variable annuity
Equity-indexed annuity

Question 3

What is a fixed annuity?

Answer 3

A fixed annuity pays periodic income payments that are guaranteed and fixed in amounts.

Question 4

What is the guaranteed rate?

Answer 4

The guaranteed rate is the minimum interest rate that will be credited to the fixed annuity.

Question 5

The fixed annuity owner has a choice of annuity settlement offers. Two characteristics are: most annuities are not annualized and are under the cash option, which funds can be withdrawn in a lump sum or in installments. what are the other six?

Answer 5

Life annuity (no refund) option
Life annuity with guaranteed payments
Installment refund option
Cash refund option
Joint-and-survivor annuity
Inflation-indexed annuity option

Question 6

What is a life annuity (no refund) option?

Answer 6

provides a life income to the annuitant only while the annuitant remains alive.

Question 7

What is an installment refund option?

Answer 7

An installment refund option pays a life income to the annuitant; after the annuitant’s death, payments continue to a beneficiary until they equal the purchase price.

Question 8

What is a joint-and-survivor annuity?

Answer 8

A joint-and-survivor annuity pays benefits based on the lives of two or more annuitants. The annuity income is paid until the last annuitant dies.

Question 9

What is an inflation-indexed annuity options?

Answer 9

An inflation-indexed annuity option provides periodic payments that are adjusted for inflation.

Question 10

A variable annuity pays a lifetime income, but the income payments vary depending on common stock prices. Name 3 characteristics of a variable annuity.

Answer 10

• The purpose is to provide an inflation hedge by maintaining the real purchasing power of the payments
• Premiums are used to purchase accumulation units during the period prior to retirement
• At retirement, the accumulation units are converted into annuity units

Question 11

Typically, if the annuitant dies before retirement, the amount paid to the beneficiary will be the higher of what two amount?

Answer 11

The amount invested in the contract or the value of the account at the time of death.

Question 12

Some contracts periodically adjust the value of the account to lock in investment gains through what three benefits?

Answer 12

Rising-floor death benefit, stepped-up benefit, or an enhanced earning benefit

Question 13

In a variable annuity, what are the four fees and expenses?

Answer 13

• Investment management charge
• Administrative charge
• Mortality and expense risk charge
• Surrender charge

PS. total fees and expenses in most variable annuities are HIGH

Question 14

What is an equity-indexed annuity?

Answer 14

An equity-indexed annuity is a fixed, deferred annuity that allows the owner to participate in the growth of the stock market and provides downside protection against the loss of principal and prior interest earnings if the annuity is held to term.

Question 15

Define participation rate.

Answer 15

The participation rate is the percent of increase in the stock index that is credited to the contract.

Question 16

What is longevity insurance?

Answer 16

Longevity insurance is a generic name for a single-premium deferred annuity that begins paying benefits only at an advanced age, typically age 85.

Question 17

What are the five characteristics of a non-qualified individual annuity purchased from a commercial insurer?

Answer 17

• It does not meet IRS code requirements
• It does not qualify for most income tax benefits
• Premiums are not income-tax deductible
• Investment income is tax deferred
• The net cost of annuity payments is recovered income tax free over the payment period, but the amount that exceeds the net cost is taxable as ordinary income

Question 18

What does a exclusion ratio determine?

Answer 18

An exclusion ratio is used to determine the taxable and nontaxable portions of the payments

Exclusion ratio= Investment in the contract/Expected return

Question 19

A traditional IRA allows workers to take a tax deduction for part or all of their IRA contributions. What are the other five options to this plan?

Answer 19

• The investment income accumulates income-tax free on a tax-deferred basis
• Distributions are taxed as ordinary income
• The participant must have earned income during the year, and must be under age 70½
• For 2012, the maximum annual contribution is $5000 or 100 percent of earned compensation, whichever is less
• A full deduction for IRA contributions is allowed under certain circumstances

Question 20

Taxpayers with incomes that exceed the phase-out limits can contribute to what?

Answer 20

To a nondeductible IRA

Question 21

What does a spousal IRA allow you to do?

Answer 21

A spousal IRA allows a spouse who is not in the paid labor force, or a low-earning spouse to make a fully deductible contribution to a traditional IRA.

Question 22

TRUE or FALSE. An IRA rollover is not a tax-free distribution of cash or other property from one retirement plan, which is deposited into another retirement plan.

Answer 22

FALSE

Question 23

What are the six advantages of a Roth IRA?

Answer 23

• The annual contributions to a Roth IRA are not tax deductible
• The investment income accumulates income-tax free
• Qualified distributions are not taxable under certain conditions
• Contributions can be made after age 70½
• Roth IRAs have generous income limits
• A traditional IRA can be converted to a Roth IRA

Question 24

What are the two distinct phases in a deferred annuity?

Answer 24

The accumulation or savings phase and the income phase

Question 25

During the _________,annuity premiums, less any applicable charges, accumulate in the contract on a tax-deferred basis until the annuity starting date. Deferral of tax on annuity earnings is a major advantage that other non-qualified financial products cannot provide.

Answer 25

Accumulation or savings phase

Question 26

What occurs in the income phase?

Answer 26

On the annuity starting date, a deferred annuity enters the income phase, at which time the value of the annuity is converted into a stream of income.

Question 27

What are six advantages of an annuity?

Answer 27

1. Earnings on your annuity premiums are tax deferred so long as they remain in the annuity. When compared to an investment whose earnings are taxed each year, tax deferral offers the potential for accumulating significantly higher amounts of money over time. 2. An annuity can be used to provide a steady source of retirement income that you cannot outlive. 3. Unlike an IRA or employer-sponsored retirement plan, there are no annual contribution limits to an annuity...you can contribute as much as you want. 4. Subject to the terms of the contract, there is no required date by which you must begin receiving annuity income payments, providing you with the flexibility to defer payments until you need the income. 5. If you die while your annuity still has value, the annuity death benefit passes directly to your beneficiary without probate. 6. In most states, an annuity is free from the claims of a creditor.

Question 28

What are five disadvantages of an annuity?

Answer 28

1. Premiums for a non-qualified annuity are not tax deductible, meaning that they are made with after-tax dollars. 2. While you can surrender or make withdrawals from a deferred annuity before you begin receiving income payments, the surrender or withdrawal may be subject to a charge if made within a stated number of years after the annuity is initially purchased. 3. If made prior to age 59-1/2, a surrender or withdrawal will be subject to a 10% federal penalty tax unless one of the exceptions to this tax is met. 4. When received, investment gains are subject to ordinary income tax rates and not the lower capital gains tax rate. 5. Once annuity income payments begin, annuity contracts vary in regard to whether the payment amount can be changed and/or whether amounts can be withdrawn from the contract. Ask your licensed financial adviser to explain whether the contract you are considering allows for annuity payments to be increased or decreased and whether withdrawals are available.

Question 29

What are the five tax implications on annuities?

Answer 29

1. Premature Distributions-Subject to ordinary income tax plus 10% penalty tax.Tax applies to amount of distribution included in income. Penalty for premature distributions does not apply to: Payments that are part of a substantial equal periodic payments made for life Payments on or after age 59½ Payments made on account of contracts owner disability Payments from qualified retirement plans and IRA’s Payments to beneficiary after death of annuitant Distributions under an immediate annuity contract Annuity purchased on the termination of certain qualified employer retirement plans Payments allocable to investment in the contract before August 14th, 1982 2. If annuitant dies before annuity starting date, cash value must be distributed within 5 years of death or 3. Used within one year to provide for a life annuity or installments payments not longer than the beneficiaries life expectancy 4. If spouse is the beneficiary, spouse can elect to become the new owner of the contract instead 5. Annuity contract transferred by gift: Tax deferral allowed on the inside build-up is terminated Tax-deferred build-up is allowed only to “natural persons” For non-natural persons -income is treated as ordinary income in the year received

Question 30

What are the seven Exceptions (not subject to penalty) on annuities?

Answer 30

1. Annuities received by the executor of a decedent 2. Annuities held by a qualified retirement plan or IRA 3. Annuities considered qualifying funding assets 4. Structured settlements 5. P&C companies funding periodic payments for damages 6. Annuities purchased by an employer on termination of a qualified plan 7. Immediate annuities

Question 31

List four options in selecting the best policy on annuities.

Answer 31

1.Spreadsheet costs and features 2. Fixed annuities – compare the total outlay with the total annual annuity payments 3. Variable annuities - Evaluate the total returns for the variable annuity sub-accounts over multiple time periods through -Morningstar and Lipper Analytical Services Inc. 4.Compare the relative financial strength of the company Rating agencies - A.M. Best / Moody’s/ Standard & Poor’s